THE FALL OF LEHMAN BROTHERS: THE MEN, THE MONEY, THE MERGER

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The year 1983 was a spectacular one for Lehman Brothers and much of Wall Street. For the fifth consecutive year, Lehman Brothers Kuhn Loeb had racked up record profits, threatening to break into the elite circle of the five top underwriting investment banks. Wall Street's oldest continuing private investment partnership had reason to be proud.

And yet, in the middle of the year, when profits were good at Lehman, things went bad. A titanic struggle took place at the firm, pitting Lewis L. Glucksman against Peter G. Peterson.

Glucksman was a man full of emotion and resentments - against ''Our Crowd'' Jews who, he thought, sneered at him as ''pushy,'' against investment bankers who disparaged him as a lowly ''trader,'' against the bankers who continued to control the firm though traders generated two-thirds of the profits, against a chairman - Peterson - who, he thought, condescended to him.

On the surface, Glucksman and Peterson were a team. Not long after Peterson assumed the chairmanship of Lehman in 1973, saving it from bankruptcy, he singled out Glucksman as a talented manager. A former president of Bell & Howell and Secretary of Commerce in the Nixon Administration, Peterson was a brilliant strategist. He was the natural Mr. Outside for the firm, presenting an impressive public image. Glucksman, he believed, was a natural Mr. Inside, promoting teamwork at the firm. So he promoted Glucksman, first to chairman of the operating committee, then to chief operating officer, then to president and, finally, in May 1983, to co-chief executive officer.

But Glucksman was not happy. In mid-July, he confronted Peterson, telling him he wanted his job. After secret negotiations, Peterson stunned Wall Street by agreeing to leave, his way smoothed by a generous severance agreement.

Lew Glucksman, at 57, had achieved an ambition that had burned in him from the day he joined Lehman in 1962. But in a matter of months, the firm would be sold.

The story of the fall of the House of Lehman was pieced together over a period of 10 months. Each member of Lehman's board of directors was interviewed, as were 34 present or former partners. Scores of Lehman employees and people on and around Wall Street were consulted and many internal Lehman documents were reviewed.

Ken Auletta is an author and newspaper columnist whose most recent book is ''The Art of Corporate Success.''

HE HAD SAID HE WOULD ''HEAL the wounds'' at Lehman Brothers, and, when he seized full control of the firm on July 26, 1983, Lewis L. Glucksman moved swiftly to apply his remedies. They were strong ones. Glucksman reorganized the leadership of the firm, shuffling jobs and making enemies. He promoted his friends; he circumvented his board. But when Glucksman and his team began to toy with the size of partners' bonuses - increasing their own and slashing others - the battle lines were drawn. Glucksman then made a classic managerial mistake, letting a contentious board hold a meeting without him. By the end of that meeting, he would have lost control of Lehman Brothers for good.

Just months after Glucksman's ascension, a decline in the market would find Lehman in turmoil and, some partners believed, desperately in need of capital. A merger with Shearson/ American Express (box, page 38) would provide the needed funds and millions of dollars for the Lehman partners; but it would also terminate the independence of the House of Lehman.

From the beginning of Glucksman's rule, personnel moves at Lehman came with machine-gun speed. Counting the management changes he had engineered in the previous 12 months, by the fall of 1983, Glucksman had installed his own man at the head of most departments in the firm.

Even Glucksman's allies worried that he was moving too rapidly. Robert S. Rubin, his closest adviser at Lehman and a fellow member of the board, says of the management upheaval: ''The speed was too fast. We didn't give enough thought. Frankly, that was supposed to be part of my role.''

And some of the new appointments were alarming to the partners. Sheldon S. Gordon, then 47 years old, whose career had been in sales and trading, was picked to run the banking division, an unusual crossover in an environment that still stereotyped ''bankers'' as the elite and ''traders'' as drones. Some bankers were unsettled by the appointment, no matter how much they admired Gordon's skills and diplomatic talents.

To replace Gordon in the equity division, Glucksman elevated his 37-year-old protege, Richard S. Fuld Jr., who was then running the fixed income division, which included commercial paper and trading in government securities. Fuld became superviser of both fixed income and equities divisions - all trading at Lehman. This made partners uneasy. Fuld was a stranger to them, a man who, for all his capability as a trader, was almost defiantly antisocial; he avoided the partners' dining room and often spoke in monosyllables. Now, he would have 22 managers reporting to him in a merged division that generated two-thirds of Lehman's profits.

Further, Glucksman enraged colleagues when he recruited two new partners from outside, offering one, Peter M. Dawkins, a retired Army brigadier general and Heisman Trophy winner, a low-interest loan said to be worth about $1 million so he could buy a Manhattan apartment, and another, attorney Allen Finkelson, a minimum annual compensation of $750,000, plus an initial ownership of 1,000 shares of stock and a jump to 2,000 shares within two years ''if things worked out,'' according to Finkelson. (A new partner coming up from inside usually started with just 500 shares, rising gradually to about 1,300 shares; only about a fifth of the 77 partners had 2,000 shares or more.)

These arrangements were made without the full board's knowledge or consent. The Finkelson move was particularly upsetting, since in a partnership, in which all the partners own a piece of the firm, the awarding of shares is supposed to be arrived at through a consensual process.

Tales of Glucksman's arbitrary or capricious behavior multiplied. Partners buzzed that he was shedding his wife of 26 years; that he had purchased a five-room apartment in Manhattan's luxurious Museum Towers, where apartments sold for as high as $5 million. He acquired a sporty brown Chrysler convertible and a new house in the Hamptons with a flag out front reading, ''Don't Tread On Me.''

One executive who had done business over the years with Lehman Brothers describes an appointment that summer with Glucksman: He was ushered into Glucksman's windowless office off the trading floor, where, after some chitchat, Glucksman grabbed a small ax from the corner of the cramped office. ''I'll tell you what kind of a company we are!'' he shouted. ''We're going right to the top!'' - and he slammed the ax into the wall. The visitor, eyeing other marks in the grass cloth wallpaper, deduced, ''He was well practiced at it.''

Just about the only caution Glucksman showed that summer was in acting on his intention to make Bob Rubin president of the firm and his No. 2 man. He knew Rubin would be a controversial choice because, while he was conceded to be a brilliant banker, he was a prickly, private man. Unlike Peter G. Peterson, he was not perceived as someone who complemented Glucksman; he was too taciturn to serve as Mr. Outside. Also, he was too secretive and shy to be another Mr. Inside, like Glucksman. Glucksman moved slowly in promoting Rubin, first putting him on the seven-member operating committee, the firm's day-to-day management body.

While partners stewed over their new chief executive officer's management techniques, and the board worried that Glucksman ignored the rules and etiquette of corporate governance, nothing so focused the attention of the firm as the annual settlement of bonuses and allocation of stock; to Lehman partners, these ranked as the most fateful decisions made each year.

BEGINNING IN JULY, THE OPERATing committee, under Glucksman's direction, met to recommend that year's bonuses. The six members of the operating committee, in addition to Glucksman, were: Robert Rubin; James S. Boshart 3d, an administrative aide to Glucksman; Sheldon Gordon; Richard Fuld, and bankers Fran,cois de Saint Phalle and Roger C. Altman. Traditionally, the C.E.O. at Lehman had the power to make final decisions about the size of a partner's bonus, including the size of the bonus of all seven members of the operating committee; in consultation with the board, he decided what percentage of the firm's common shares (then showing a book value of $640.19 per share) each partner was entitled to.

Despite the style of living many partners were enjoying and the ample fees Lehman was billing - merger and acquisition fees alone totaled $56 million for the fiscal year ending Sept. 30, 1983 - partners' salaries were relatively modest (then ranging from $75,000 to $125,000 annually). And since bonuses had ranged in recent years from two to 10 times salary, no partner greeted these decisions lightly.

Bonus expectations were high among the partners. It had been a good year on Wall Street. And it had been a spectacular year at Lehman. Profits reached $147.7 million before taxes and bonuses. The pool of money set aside for bonuses jumped from $20.6 million in 1982 to $27 million.

Bankers in the firm were aware that for years traders had complained about disparities in their bonus and stock allotments. Glucksman had warned them during the 1982 deliberations that he believed a fundamental redistribution of the firm's profits and ownership was in order.

From 1980 to 1983, the trading divisions produced $4 of profit for every $3 brought in by banking - $210.8 million against $165 million. In 1982, the banking division, as Bob Rubin notes, produced only 37 percent of the profits but received 60 percent of the bonuses; and there were a mere 29 partners from sales and trading.

In the face of strong opposition from bankers, and under the restraining influence of Peterson, Glucksman had retreated from his demand for a dramatic redistribution in 1982.

Now, alone at the helm, Glucksman was determined to right past wrongs. He allocated bonuses and the distribution of shares based not on what partners had traditionally received or on their status within the firm; rather, he strove to make decisions on what he said were ''the merits'' of each partner's performance. In fact, many banking partners believed his decisions were too personal, meant to settle old scores. They believed that Glucksman was not controlling his demons.

When the bonus schedule was reviewed by bankers Peter J. Solomon, Harvey M. Krueger and William C. Morris - who as members of the former executive committee had traditionally reviewed bonuses - they were outraged. Solomon, who had had what he considered a very good year - what he considered a $500,000-bonus year - was the firm's premier retail- industry investment banker, and he was scheduled to get $375,0000, a raise of just $25,000 over 1982. Krueger's bonus would drop $25,000, from $325,000. And Morris's was scheduled to plunge from $400,000 to $300,000. On top of this, they learned that Glucksman and Rubin planned to take 500 shares of Lehman stock from each of them, reducing their ownership from 2,500 to 2,000 shares apiece.

At a lunch in the 41st-floor executive dining room off the trading floor, the three banking partners expressed to Glucksman and Rubin their chagrin. Thinking he might win their support, or at least their acquiescence, for the overall bonus schedule, Glucksman finally agreed to leave their stock intact and to fatten each of their bonuses. Solomon got an additional $25,000, a ''tip,'' as he called it; Krueger and Morris each got $100,000 more than originally offered. ''They got bought off,'' complains a member of the operating committee. ''Lew came to the operating committee and told us, 'These guys are bitching and moaning. I've got to give them more to shut them up.' '' Peter Solomon flatly denies this. As a protest, he and Krueger each gave 100 of their shares to charity. Solomon insists he, joined by Krueger and Morris, opposed the entire bonus and stock plan. Morris says he went along with the entire plan. Glucksman says that after the lunch, ''They went along with it.'' And the testimony of board members supports Glucksman's interpretation. When it came to their annual review of bonuses and shares, says Sheldon Gordon, a board member since 1980, ''there was never any kind of dissent on the board. I recall automatic approval.'' Solomon says dissent was voiced in private meetings among the five men, not in the board meeting.

The full board convened on Sept. 21 and was presented with the bonus schedule and stock distribution plan. Among the highlights: Lew Glucksman and four other senior executives received 25 percent of the total bonus pool. Glucksman's bonus jumped from $1.25 million in 1982 to $1.5 million (and since Peterson's severance agreement awarded him the same bonus as Glucksman, his former co-C.E.O., that was his bonus as well); Richard Fuld, whose trading operations attained record profits, also received $1.5 million, down from $1.6 million the previous year. (Glucksman thought it would look bad if his protege received more than he did.) Sheldon Gordon went from $400,000 to $1 million.

The bonuses of several bankers were sweetened. Operating committee members Roger Altman and Fran,cois de Saint Phalle jumped from $350,000 to $450,00 and $500,000, respectively. Generally, however, the bonuses of various banking partners did not conform to this pattern. For example, Yves- Andre Istel, the senior international banker and board member who had come over in the 1977 Kuhn Loeb merger, dropped from $250,000 to $200,000; and, most stunning of all, Glucksman ally Eric J. Gleacher, after a robust year of orchestrating mergers, including Allied's merger with Bendix, was raised a mere $25,000 to $400,000 - less than other M.& A. partners.

What appeared to be favoritism toward trading and sales was also noted in the way the partners' stock was distributed. Each September, the board decided how to redivide a fixed pool of 102,000 shares. Rarely did senior partners find their shares sharply reduced or augmented. But in September 1983, Glucksman's shares rocketed from 3,500 to 4,500. Rubin went from 2,500 shares to 2,750 shares; Shel Gordon and Dick Fuld each climbed from 2,000 to 2,750 shares - 250 more shares than Solomon, Krueger or Morris. And the disparity between them would have been greater had Glucksman succeeded in reducing the three bankers' shares by 500 each. What appeared to be a disproportionately large number of bankers had had their slice of the pie reduced and reapportioned among the trading departments. The signal sent by Glucksman to the bankers was clear, and terrifying.

The bonus schedule was heralded as ''fair'' by bankers such as Roger Altman, a Peterson protege then widely perceived to be ingratiating himself with Glucksman. The jump in Glucksman's stock ownership was applauded by operating committee member Fran,cois de Saint Phalle, who headed a study committee that found that the C.E.O.'s of their competitors owned 4 percent to 5 percent of the stock, not the less than 4 percent owned by Glucksman. ''Compare his ownership as chief executive with other chief executives, and he was light. There was plenty of justification for his increase in stock,'' says de Saint Phalle.

Although the board went along with the plan, privately many partners seethed. Bankers believed Glucksman was behaving like a partisan for trading and was intent on revenge. In a partnership, where the rewards are to be shared, a loss of trust can be devastating. And in his first two months, Lew Glucksman began to lose that trust. ''If you were Machiavelli,'' says a former partner, ''you would have been modest in your own bonus and stock. You would have shored up your weaknesses in banking.''

Still, Glucksman did not get the full force of the partners' gathering fury. He heard protests, but they were usually polite. Partners went along with the bonuses and the stock plans, as they had gone along when Glucksman toppled Peterson.

BY EARLY OCTOBER, FOUR PARTners had left or announced plans to leave. Pete Peterson, who had agreed to relinquish his co- C.E.O. position at the end of September (while remaining chairman through the end of 1983), continued to appear in the office, reassuring nervous clients and conversing with partners he had once ignored. He also looked after the interests of the seven corporations on whose boards he served and continued his work as an outside consultant.

For nearly 10 years, for example, Peterson had served as a financial consultant, at an annual rate of about $75,000, to Generoso Pope Jr., an old college chum, who owns, among other things, the sensational tabloid, The National Enquirer. (When the subject of his relationship with Pope came up during an interview for this article, Peterson said that although he did no work for The Enquirer, he planned to relinquish his consultancy.)

Other departing partners were George A. Wiegers, who announced plans to join Dillon, Read in the spring of 1983, before Glucksman assumed full command; board member Edmund A. Hajim, whom Glucksman had forced out as head of Lehman's money management arm in May, and Mario d'Urso, an international banker forced out by Glucksman late that summer. What came to be seen as a caravan was augmented later in October by board member Yves-Andre Istel, whose shares and bonus had just been pared.

Istel believed the firm, in shifting its emphasis from high- fee investment banking to high-risk trading, lacked the reservoir of capital possessed by such giants as Merrill Lynch, Shearson/American Express, Prudential- Bache or Salomon Brothers. So Istel left to become co-chairman of the international banking division of the First Boston Corporation, where he was soon joined by his Lehman clients, Saint-Gobain, Henkel and Olivetti.

When Eric Gleacher announced his decision to leave the firm on Nov. 1, partners were stunned. Gleacher was fed up. ''What they did when they paid out the bonuses in September was the primary reason I left,'' he says, denying that his own puny bonus contributed to his departure. ''The fact that Lew and Rubin allocated 25 percent of the bonuses to themselves and three other guys'' - Gordon, Fuld and Peterson - ''was unfair. I thought this was such a sign of real trouble. Anybody with common sense would not be so greedy. And not pay off three guys to get the bonuses passed. Something in me went off. Life is too short.''

What was clear was that Gleacher, the banker closest to Glucksman, was bailing out, withdrawing his $5 million in stock - a sum representing about 2 percent of Lehman's equity - and moving laterally to become a partner at Morgan Stanley.

Gleacher's decision shook the entire firm. ''Eric was the best of the M.& A. partners,'' observes one former Lehman vice president. ''He had just come off doing the Allied/ Bendix deal. We were the bankers for Allied, which won. Eric was king. It was an enormous blow.''

The departure of six partners provoked more than a crisis of confidence; it prompted partners to raise what came to be called ''the capital issue.''

When a partner leaves Lehman, he sells his shares back to the partnership at the current rate and collects his money in semi-annual increments over a fixed payout period. (Partners are often hazy about this payout period, saying it lasts three years, which is what was reported last week in Part I of this article. In fact, there are two different payouts; for stock owned prior to 1979, the payout period is 2 1/2 years; for stock acquired after 1979, the payout period was extended to five years.) The six who were leaving Lehman would eventually take with them some $30 million, representing about 17 percent of Lehman's total capital. An additional drain on the firm's capital was caused by the redistribution of stock; those partners forced to give up shares sold them at their current value, which was six times the $110 per-share purchase price paid by partners for new stock. Should other partners follow, the drain might cause a panic.

In addition, the departure of the six came at a time when Lehman's ''gray books,'' the monthly performance reports circulated to all partners, made clear that business was declining. And the dip in business reflected mostly a drop in trading activity, Glucksman's source of power.

Partners began to wonder whether they would be able to withdraw the enormous wealth they had accumulated in Lehman stock.

''The Gleacher thing scared me,'' admits Glucksman. ''I was concerned that too many partners had near-term needs for cash. We were paying 1 percent on the equity partners had in the business.'' Their equity appreciated with each year's rise in profits, but aside from their annual 1 percent dividend (which Glucksman raised to 3 percent in 1983), this wealth was untouchable unless they sold their shares.

These ingredients contributed to a second reason the ''capital issue'' surfaced at Lehman. Along with Glucksman's success in building a trading and sales operation, Peterson had committed the firm to becoming a full-service bank, a financial supermarket. Retail, institutional, corporate and governmental customers could come to Lehman if they were shopping to merge, to divest, to undertake a leveraged buyout, to swap debt for equity, to have bonds underwritten, to trade stocks, to purchase zero coupon bonds or Treasury notes or municipal bonds, to invest in a money fund or real estate. But, in order to compete against the giants in a deregulated banking environment, large amounts of capital were required.

Many partners began to worry aloud that Lehman's capital base, then $176.6 million, was insufficient. Steven R. Fenster, a banker and Lehman's resident thinker - the ''professor,'' as partners sometimes called him - had been focusing on the subject for some time. He became convinced that Lehman needed additional capital. Without it, he worried that the firm would get squeezed between the low-cost giants like Shearson or Merrill Lynch and the specialty boutiques, like Lazard Fr eres. He did not believe the business could continue to grow the way it had. A market downturn was in order. And when it came, he worried that Lehman could not easily shrink its annual $437 million overhead.

FENSTER'S nightmares came alive in the fall of 1983. In the volatile world of trading, the bull suddenly was transformed into a bear market. Lehman's profits shriveled. This produced new converts to the idea that the sale of Lehman might be the only way out. Among them was Roger Altman. ''I only came to the conclusion we were seriously undercapitalized during the budget process of October,'' he says. ''Because we had had five consecutive years of record growth and had been retaining 80 percent of earnings, our capital went up each year. We had been generating enough capital to finance the growth we were experiencing. I was of the view we could continue - until October 1983. Many people came to this conclusion earlier'' - Steven Fenster and Peter Solomon were among them.

On the other side of the issue were some internally powerful forces, including Bob Rubin, Dick Fuld, Jim Boshart and, at first, Lew Glucksman. He worried that an infusion of substantial outside capital would only come about through one of three means: merging the company into a larger entity, as Kuhn Loeb did when it married Lehman or Shearson, when it linked with American Express; recruiting an outside investor to purchase some of Lehman's stock, as Dillon, Read did when it recruited Bechtel; or taking Lehman public, as Merrill Lynch, Dean Witter and First Boston had done. Each of these alternatives was unattractive to Glucksman, because it threatened Lehman's traditional independence and his own power base.

Joining Glucksman's core group in opposition to those who claimed Lehman's capital was inadequate were two long-time members of the banking department, William Morris and Henry R. Breck (who had recently been named head of money management). They believed the ''capital issue'' was really a mask, a subterfuge for partners who wanted to cash in and sell the firm at a premium.

''I believe we had more than adequate capital,'' says Morris. The question, he argued, was: ''What was it the partners desired to get done? I don't think getting more capital into the business was uppermost in their minds. Getting their capital out of the business to reduce their risk was.''

This group began to advance the argument that if partners were truly concerned about capital there was a fourth alternative: shrinking the firm. Instead of compromising the private partnership, they believed Lehman should concentrate on banking services and on those products - perhaps commercial paper, perhaps money management, perhaps retail sales - where it was strong.

In the early fall, Lew Glucksman had not yet come down on either side of the debate. His heart was with Rubin and Fuld and Boshart, who sensed that now that the traders had received their place in the sun the bankers were greedily manuevering to dilute their power. But Glucksman's head told him something else. He believed Lehman needed a capital infusion. That is why he closed a $50 million loan from Prudential in September; it was listed as subordinated debt and thus boosted Lehman's capital. Nor did Glucksman believe Lehman could shrink without paying a terrible price, including revenues that might disappear faster than costs. Between his heart and his head, Glucksman was uncharacteristically ambivalent.

Into this vacuum stepped Sheldon Gordon. Partners looked upon Gordon as a skilled corporate politician. ''Shel Gordon could tiptoe through a beach and not leave a footprint,'' observed one Lehman associate. Gordon believed that Lehman had made the correct decision in the mid- to late 1970's to become a full-service firm. Because of the volatility of trading, Gordon believed partners would rest easier with a larger capital cushion. ''I always felt the size of our capital base was probably half of what it would have to be over a two- or three-year time period,'' explains Gordon.

So Gordon gently prodded his partners. Those like Solomon and Stephen A. Schwarzman, a mergers and acquisitions specialist, who felt estranged from Glucksman, always found the door to Gordon's office open. Since Gordon was trusted by Glucksman, he provided the perfect umbrella under which various factions could gather.

IN NOVEMBER, THE number of partners convinced the firm was being weakened by Glucksman & Company swelled. In addition to the abrupt management changes, the private deals with Finkelson and Dawkins, the bonus and share decisions, the exodus of partners and capital, another persuasive piece of evidence came on Nov. 8. On that day, Glucksman formally told the six other members of the operating committee that he intended to appoint Robert Rubin president.

He encountered resistance. Several members of the operating committee said they were troubled by the process being followed to appoint Rubin. ''Roger, Shel and I felt there hadn't been a formal process to decide how to choose the next president,'' says de Saint Phalle. Glucksman countered by saying that he wanted a united operating committee to recommend Rubin to the board, which was scheduled to meet on Nov. 10.

Although they did not then share with Glucksman their doubts about Rubin's managerial abilities, like many partners, the three men were troubled. They worried about Rubin's leadership skills, about whether he was too much like Glucksman, a Mr. Inside. No one questioned Rubin's brain power, his ability to quickly size up a financial deal or spot risks. He was, by most accounts, the most brilliant banker at Lehman. But he was a tight- lipped, uncommunicative man.

Gordon wanted to give the board more time to deliberate. Altman and de Saint Phalle agreed more time was needed and emphasized an additional concern: They did not want to take responsibility for recommending a president unless they had the authority to vote for a president. Since they were not members of the board, they said this authority was denied them.

Glucksman asked the three to meet alone with Rubin the next day to permit Rubin to discuss their concerns. The meeting was held in Rubin's office, and afterward, in an act Glucksman thought would be perceived as ecumenical, Glucksman invited de Saint Phalle and Altman to become board members. Glucksman said it was good management for members of the operating committee to serve on the board, which set broad policy. He also announced his intention to add a third and fourth partner to the board - his administrative arm, James Boshart, and the man he had installed as head of the firm's money management division, Henry Breck.

On Nov. 10, after a three- hour debate in the board room, the four new members were approved; the bankers on the board were appeased by the addition of a fifth member to the board - W. Richard Bingham, the head of the mergers and acquisitions department, who would soon go off to run Lehman's San Francisco corporate finance office. Bingham was nominated by banker William Morris, a Rubin ally, and encountered no opposition.

''For at least 10 minutes peace reigned,'' says Glucksman. The new board members filed into the meeting. Everyone knew what Glucksman proposed to do this day, and now he did it; he nominated Rubin for president. Peter Solomon tried to pierce Rubin with a question: ''What are the talents you have to be president of the firm?''

Rubin answered the question between puffs on his dark, thin Schimmelpenninck cigars, which he chain- smoked. He said board members were absolutely correct about him and wrong about Glucksman. ''I made it clear to the board,'' recalls Rubin, ''that I am a private person. I do not like meeting new people. I probably don't like the normal social amenities people from all walks of life like. I don't go out for three-hour dinners. I'm not going to change.'' He didn't have to, he said, because ''Lew is not like that. He acted like that while Pete was chairman, because Pete was the consummate outside person. If only you would look at Lew's diary from last July to now you'd see what functions he went to, what clients he visited. I think you'd see by the record that he was happy, and doing well as an 'outside person.' ''

Rubin told the partners he believed Lehman's capital was adequate, and flatly stated his opposition to the sale or merger of the firm. He also promised that Lehman would be more open, and said he and Glucksman planned to initiate regular Monday board luncheons.

Still, Bob Rubin was not a man to grovel. He wanted to satisfy his partners, but he did not see himself as a seeker of the office; he was responding to a request from his friend Lew Glucksman. He simply concluded his remarks by expressing the belief that he could do a good job, and he left the room.

Joining Glucksman in advancing Rubin's candidacy were William Morris, Richard Fuld, Henry Breck and James Boshart. To them, Rubin was a counterweight to Glucksman, a man who stood up to Lew and could slow him down, a man who made them feel secure. To many trading partners and associates, Rubin was the one person whose roots were in banking but who nevertheless understood their grievances. ''Bob Rubin is the most unfairly maligned person in this organization,'' Boshart recalls saying. ''He is the most decent person I have met here. When many of us started with the firm, Bob Rubin was the person we aspired to be.''

The discussion went on for an hour and a half. Then Glucksman started to poll the partners. The tide turned when he called on Harvey Krueger, the 54-year-old head of the audit committee. Krueger said, ''You're entitled to pick your own chief operating officer.'' Others chimed in their agreement. Then Krueger moved for the unanimous confirmation of Rubin as president. Peter Solomon shrugged and went along. The vote was unanimous.

THE FIRST OF the promised Monday board lunches was held on Nov. 14. It was a pleasant, even harmonious, lunch. But the harmony was short-lived. Before the month was out, another bomb went off at Lehman when Pete Peterson, in the course of a casual conversation with

Eric Gleacher in the Hamptons, learned of a merger bid. In May of 1983, Gleacher told him, one of Gleacher's regular clients, Conagra, a large agriculture and food company based in Omaha, approached Gleacher with a $600 million offer to purchase Lehman. Gleacher said he told Rubin, and then Glucksman, of the offer.

Rubin, Peterson learned, told Gleacher the deal wasn't ''do-able'' because Conagra was too small to take on such a massive obligation. Glucksman also turned down his friend Gleacher, saying the timing was not right. Glucksman never took it to Peterson or the board because, he says, ''It was such an improbable thing, it was never seen as a real deal.''

Since he was still chairman at the time, Peterson was mortified. Glucksman and Rubin had violated a basic rule of corporate governance by not telling him, and may well have violated their fiduciary responsibility to their partners.

After consulting with his lawyer, Peterson demanded that Glucksman and Rubin disclose this matter to the board. He further demanded a piece of paper certifying that he was not informed of these discussions and thus could not be a target of potential lawsuits from partners who might claim they were robbed of an opportunity to sell their stock, worth $176.6 million at the time, at three times its stated value.

The board was informed at their Monday luncheon on Nov. 21. Rubin reported matter-of-factly on the discussions with Peterson about Conagra and explained why he felt the Conagra feeler was ''a non-starter.'' At the time, the board seemed to agree with Rubin.

It took a little time for the Conagra issue to sink in. Many members of the board sided with Rubin on the merits; they thought Conagra was too small. But they were aghast at the unilateral process Glucksman and Rubin followed in reaching this decision. Like so much else that had happened in recent months, it became a corporate-governance issue. It also seemed to signal that there was no way Glucksman or Rubin would contemplate the sale of Lehman.

''Conagra opened Pandora's box; it opened discussions about the sale of the firm,'' says James Boshart. ''Lew and Bob were genuinely puzzled why this was made a big deal of.''

The uneasiness at Lehman goaded Glucksman into a fateful decision. To placate what he believed was an emerging majority who wanted to cash in or were unhappy with Lehman's management, he decided Lehman would need an outside investor to purchase, at a premium, something less than 50 percent of Lehman's stock. In making this judgment, he parted company with Rubin, as well as Boshart and Fuld, who preferred to shrink the firm.

But events were racing ahead of Lew Glucksman's ability to control them. He believed he had come to the correct business decision about capital, though he hated agreeing with Solomon, among others. He believed he had arrived at this decision on the merits, because the firm needed more liquidity, while his partners, he thought, had raised the capital issue as a cover for their avarice and their hunger to humble Lew Glucksman.

Nevertheless Glucksman tried to reach out, to heal the wounds at Lehman. In what he thought was a statesmanlike fashion, he suggested, at one of the regular Monday board luncheons, that to avoid even a hint of unfairness in awarding future bonuses and shares the board should select a compensation committee to make recommendations. He said Gordon and Fuld, as the managers of the two largest divisions, should be members. He wanted the board to select the others. As an added gesture, Glucksman said that neither he nor Rubin would serve on the compensation committee or attend the selection meeting.

THE SELECTION meeting convened one afternoon right before Christmas in the corner conference room on the 44th floor. And without Glucksman and Rubin there, the dynamics of the meeting were altered. The mood of most of the board members was described by Fran,cois de Saint Phalle: ''We were all very goosey about the outlook for our business. There was an enormous amount of disgruntlement. A real sense of impending disaster was lurking in the wings.''

After concluding the stated purpose of the meeting - selecting three additional board members (Morris, Krueger and Bingham) to serve on the compensation committee - the conversation veered to the forbidden subject.

''O.K., how do you feel about selling the firm?'' Henry Breck asked each partner in turn. Today, for the first time, every board member save one said he either worried about the adequacy of the firm's capital or wanted to sell the firm. Today, for the first time, Henry Breck and Bill Morris publicly sided with those pushing for a sale. ''Only Boshart said he didn't want to do it,'' recalls Breck, who was a Glucksman and Rubin ally.

''It was maybe the first time these guys on the board expressed worry publicly,'' says Solomon. ''Any meeting where partners could talk and not worry about Lew was significant.''

With this meeting, the board effectively seized control of Lehman from Lew Glucksman, Glucksman having seized control himself a mere five months earlier. According to Breck, ''What Glucksman had done is allow the board meeting to take place without his being there. It was a classic management error. An error we never allow our corporate clients to make.''

The weakened business climate, the worries about liquidity, the unhappiness with Glucksman's management of the firm, the personal insecurity of partners, the desire to participate in a single transaction that would net each partner a handsome premium - all of these factors came together in January of 1984.

AT THE MONDAY board lunch on Jan. 9, it was immediately clear that power had shifted from Glucksman to the board. New members became more assertive, as did Shel Gordon, who had met privately with Glucksman before the meeting and urged him to appoint a committee to probe the ''capital question,'' which was a euphemism for sale.

With Glucksman's reluctant approval (''I responded to what the board wanted,'' admits Glucksman) the board resolved to appoint a three-member committee - Glucksman, Rubin and Gordon - ''to examine capital alternatives, including the adequacy, permanency and liquidity'' of Lehman's capital. There were no dissents about appointing a committee.

To underscore its new strength and courage, the board set a March 19 deadline for the committee to report on its ''capital search.'' The board also insisted on adding a fourth member to the committee - Peter Solomon. Suddenly, Solomon's thorny independence made him attractive to the board.

Solomon knew who was responsible for his emergence - Sheldon Gordon - and why. ''I have a lot of admiration for how Shel handled himself,'' he says. ''He was fortunate to have me on the left, or the right, of him. He needed someone to establish the poles.'' Board members believed that Solomon would never permit Glucksman or Rubin to maneuver to avoid the sale of the firm. And they knew that of the four members, Peter Solomon, former Deputy Mayor of New York, former counselor to the Secretary of the Treasury, might have the most valuable business contacts.

The turn of events left Glucksman depressed. He thought he had dealt with the concerns of partners for more personal liquidity in October, when he agreed to boost the annual dividend on their stock to 3 percent, when he raised salaries by $25,000 and announced a new personal loan program and advanced three small quarterly bonus payments. He had parted company with Rubin in coming to believe a minority investor was necessary to shore up Lehman's capital. But, he says, ''the last thing (the board) wanted was a minority shareholder and not being able to sell their stock at a premium. I wanted the money to go into the business.'' He believed the partners only wanted the money to line their pockets.

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Lew Glucksman saw support slipping away. He sensed that Shel Gordon was using Peter Solomon as his battering ram and no longer counted on Gordon's support in a showdown. He believed Harvey Krueger was determined to sell; Krueger had a keen interest in Israel and was then just months shy of his 55th birthday, meaning that in five more years, at age 60, would be required by company policy to start selling his stock back to the firm. He felt William E. Welsh, who was then 52 and had spoken often of learning foreign languages and traveling, was also inclined to sell.

No one had to tell Lew Glucksman that the stock market was not on his side then. Stable interest rates reduced profits; a slowed stock market meant less volume and fewer commissions, and the business outlook was dim, particularly in trading and sales.

Glucksman felt he could count on the loyal support of Rubin, Boshart and Fuld. But he also knew they preferred to shrink the firm rather than seek more capital. ''My allies were not my allies,'' Glucksman says, ruefully. ''I was caught between two groups. It was clear to me the board wanted to sell the company. That's where I disagreed with Dick and Bob and Jim Boshart. I felt it was difficult to oppose the board and a clear mandate of what the partners wanted. So I became an advocate of a position I didn't want.''

OVER THE NEXT two months, the four-man committee deliberated in secret. The news blackout tended to inflame the already raging passions at Lehman. Partners, including several outside the board who had gotten wind of the panel, wondered why there was no news from January through February. ''In two-and-one-half months I don't think they did anything,'' observes one banking partner. ''They didn't make calls. They didn't do up professional memorandums. They received people who made calls.''

Fran,cois de Saint Phalle recalls: ''A lot of partners came to me and said, 'Look, you get us out of this. You're on the board.' ''

What they wanted to get out of, de Saint Phalle says, was ''the management crisis. The capital crisis. The business crisis. People were sitting there looking at their investment and seeing the high probability, over the next three to six months, that Lehman could lose considerable money. For me, it was a straight investment decision. We had made a lot of money in the last four years, and it was time to sell.''

The partners were depressed, and frightened, by Lehman's internal earnings reports. From October 1983 through February 1984, income totaled just $7.1 million before taxes and bonuses, compared with $87.3 million in the year-earlier period. Since the banking division was still thriving, partners understood that buried in these figures were substantial trading losses, though they did not know how large these would eventually be. Because of the $30 million or so taken from the firm by the six partners who had left, the equity capital of the Lehman holding company had plunged from $176.6 million on Sept. 30, to $145.1 million at the end of March.

A sense of desperation was heightened on March 12, when the four-man ''capital committee'' reported to the board of directors. They sketched the various conversations they had had with potential suitors, without naming them. Some partners found the group strangely vague, eerily calm. The panel promised to be more vigorous in seeking suitors. By this time, the board's skepticism had hardened into cynicism.

ALTHOUGH LEHman was in turmoil, the fact had so far been concealed from the public. But in March, a Fortune magazine article triggered a firestorm. The four-paragraph story, written by Monci Jo Williams, began this way: ''In Lewis L. Glucksman's first six months as head of Lehman Brothers Kuhn Loeb, the firm became so deeply split that the board has decided to sell it.'' Williams reported that ''in March, Lehman suffered a loss in trading'' - without citing a figure (the March results were not circulated until April) - and that a ''committee of Lehman partners'' was ''busily peddling the firm.'' She concluded: ''But several potential buyers have already decided to pass on Lehman, saying that the personality of the firm and its politics may make Lehman more trouble than it's worth.''

''It was a devastating article,'' recalls James Hood, who was responsible for marketing and press relations at Lehman. ''As that article moved around the firm, it only took reality a few days to catch up with the perception Fortune painted. At that point, the paralysis was full. People stopped working.''

The article infuriated and terrified partners. It was a reminder of a new and sometimes seamy fact of life on Wall Street: the well-placed leak and aggressive public- relations schemes are weapons in the new style of corporate combat.

The Lehman board met and issued a carefully hedged statement to the press on March 29: ''We have no plans to transfer ownership of the majority of the capital, nor will the firm initiate such a plan. Nothing has been done or consummated, nor are we in serious negotiations to that end.''

A partners' meeting, called for Friday, March 30, was abrupt - lasting just 15 minutes - and served to further alarm the people at Lehman. Glucksman refused to discuss the substance of any rumors about a sale of the firm, about trading losses or about capital adequacy. He was visibly angry and warned that anyone who spoke with the press should be fired.

''It was clear to everyone at this point, whether they were trading people or in investment banking, that these guys were no longer capable of effectively governing the firm,'' says the mergers and acquisitions specialist Stephen Schwarzman.

That afternoon Schwarzman went to see Shel Gordon. ''I told Shel I thought it was pretty clear the firm was under enormous stress, and I thought it was too late to get any non-industry purchaser. But it was still possible to find an industry partner.''

THAT FRIDAY night, Peter A. Cohen, Schwarzman's next-door neighbor in the Hamptons, decided to read a magazine before turning in. Weekends were special for Peter Cohen, the 37-year- old chairman and C.E.O. of Shearson/American Express, his time to unwind with his wife and two children. During the week, Cohen is all business. At Shearson, he is known as a ''numbers cruncher,'' a tough negotiator, a superb cost-cutter, a man perhaps more comfortable with numbers than with people.

Cohen settled into bed and opened the latest Fortune. Late in 1983, Shearson/ American Express had taken its top managers on a retreat, where it was agreed that the firm was interested in acquiring a blue-chip investment banking firm to complement its strength as a retail brokerage house. When Peter Cohen's eyes focused on the Lehman story in Fortune, bells went off. ''This is it,'' he said.

The next morning, Cohen telephoned his two immediate superiors, James D. Robinson 3d, chairman and C.E.O. of the parent company, American Express, and Sanford (Sandy) I. Weill, president of American Express and Cohen's former mentor at Shearson. They gave him the green light to explore a merger.

Lehman's strength in banking, trading and as a primary dealer in United States Government securities would shore up Shearson's perceived weaknesses in those areas; it would bring the luster of Lehman's name, and Lehman's client list; it would jump Shearson from the No. 3 securities firm to No. 2, ahead of Salomon Brothers and trailing only Merrill Lynch in terms of total capital. With Shearson's proven ability to manage and cut costs, a hefty portion of the purchase price could be subsidized by lopping off people and redundant functions.

After spending the morning on the telephone, Peter Cohen took a break early Saturday afternoon to drive his wife and son to the supermarket. At about 2:30 P.M., the station wagon re-entered their four-acre compound, going past the copper gates, around the serpentine driveway, past the manmade pond, past the two copper-roofed glass buildings separated by a moat and connected by a bridge. The car stopped in front of the house.

A short, familiar figure stood waiting at the end of the driveway - Stephen Schwarzman. He was smiling broadly.

''Peter, I've got to talk to you,'' Schwarzman recalls saying.

''About what?'' answered Cohen, who was surprised to see his neighbor.

''I want you to buy Lehman Brothers.''

''What would I ever want with a bunch of prima donnas like that?'' Cohen answered.

The two investment bankers did not have to exchange winks. Each knew how to play the game. Although Cohen was an operations executive, a manager, he socialized with a community of investment bankers, a pack that moved in the same circles. They were the go-go bankers and entrepreneurs whose names often shot across the business pages, who put together the megabuck deals and leveraged buyouts and had become, unlike bankers of another era, stars. Peter Cohen and Stephen Schwarzman had talked many times before about a marriage of their two companies. But Cohen always concluded: ''Stephen, it's not something we're interested in.''

This time, Cohen was interested. For the next two hours, the two reviewed why such a merger would be advantageous to Shearson, and what the pitfalls might be.

There were several questions in Cohen's mind. Would Glucksman and Rubin be willing to step aside? Would senior people at the two firms be able to work as one? Could Lehman partners be persuaded to stay, giving up their private partnerships to become employees of a $10 billion financial-services empire? Cohen remembered that when Merrill Lynch had acquired White, Weld in 1978, several status-conscious banking partners refused to join a retail house, which is what Shearson is known to be. Unlike the case with the Salomon merger with Phibro, a non-Wall Street commodities trading company, Shearson and Lehman departments would overlap, making a fit more difficult. Would Lehman clients stay with a merged company?

''I told Peter the deal would be excellent for him personally,'' says Schwarzman. ''It would be prestigious and newsworthy. And, I said, 'It would be your deal, not Sandy's.' ''

By Sunday, Cohen had reviewed these and other points on the telephone with his team and spoken again with Schwarzman, who remembers advising Cohen to call Lew Glucksman on Monday morning. Schwarzman so distrusted Glucksman that, he says, he cautioned Cohen to be sure to mention that they had talked about the merger over the weekend. That way, said Schwarzman, Glucksman would not dare dismiss out of hand a bid from Shearson/American Express and fail to present it to the board, the way he had secretly vetoed Conagra. (Cohen does not remember getting this advice.)

On Monday morning, Cohen first telephoned Robinson and Weill for approval, then called Glucksman. He remembers the call this way:

Cohen: ''I read the present Fortune.''

Glucksman: ''You can't always believe what you read.''

Cohen: ''I know that. But it stimulated the thought that we have a lot of complementary strengths, and maybe you'd be interested in talking.''

Glucksman recalls telling Cohen: ''I'd love to meet with you if you people are serious.''

''We are serious,'' said Cohen.

They agreed to move fast, and Glucksman said he would call Cohen back after he met with his board at 10:30 that morning.

By this time, Lehman board members had an additional reason to be anxious. The March figures were being processed, and they revealed another dismal month. All over Wall Street, business was down. But unlike other firms, Glucksman refused to slash overhead costs, believing that the firm had to ride out the storm and be prepared to jump in with both feet when the market perked up.

Although Glucksman would later tell Forbes magazine ''there were no heavy losses in this firm'' during his reign and to this day proclaims, ''We had no losses. We were profitable up to the end,'' that is not quite the case.

Lehman's books show that the equity and fixed income trading divisions of Lehman lost $12.6 million in March before taxes and bonuses, losses that were only partially offset by the profits of the banking and money management divisions. In all, Lehman lost $5.5 million in March of 1983. From Oct. 1, 1983, to March 31, 1984, the first six months of the fiscal year, Lehman's pre-tax, pre-bonus profits dwindled to $1.6 million (compared to profits of $94.3 million the first six months of the previous year). But after paying partners' bonuses, Lehman lost $1.8 million in the six-month period (compared with post-bonus profits of $74.3 million a year earlier). And trading losses escalated in April and early May, prior to the final merger.

Inside Lehman, these dire numbers were no secret. They helped produce a psychological reversal of roles. Now, the bankers were carrying the traders. Already burdened with the open trench warfare at the firm, partners were distraught.

The Shearson feeler was seen as a life raft. Lew Glucksman remembers telling the board: ''This is very serious. I think we have a buyer here.'' He asked for, and received, permission to negotiate.

Partners wondered if they could trust Lew Glucksman to put his heart into selling Lehman. As a precaution, Schwarzman met secretly that afternoon with Shel Gordon to fill him in on his conversations with Cohen; and that evening, as he would most evenings for the next 10 days, Peter Cohen telephoned Steve Schwarzman. ''He told me Lew handled the matter very professionally,'' says Schwarzman.

On Tuesday, April 3, a breakfast meeting was conducted around the heavy rectangular table in James Robinson's private dining room at Shearson. It was attended by Robinson, Sanford Weill, Peter Cohen and members of his team, as well as Glucksman, Rubin, Gordon and Solomon. By all accounts, it went well. At the beginning of the meeting, Glucksman and Rubin announced that if Lehman and Shearson merged, they would step aside. Asked later if their stepping aside was a prerequisite to any deal, American Express chairman and C.E.O. James Robinson, a courtly gentleman with a trace of his native South in his voice, answered: ''Right.''

At the end of breakfast, Shel Gordon remembers, Peter Cohen eliminated one of Lehman's hopes: ''Let me make clear that we are not interested in any minority interest. If we are interested, it is only on the basis of a total deal.''

''We said, 'Let us get back to you,' '' recalls Gordon. That night, after a Lehman board meeting, Glucksman called Peter Cohen and told him: ''We would like to pursue something with you.''

THE NEGOTIAtions lasted seven days, from the initial meeting on April 3 to the April 10 announcement that Lehman, after 134 years as a private partnership, was becoming the 18th firm to merge with the firm then known as Shearson/ American Express.

The American Express board approved the acquisition of Lehman Brothers Kuhn Loeb on the morning of April 10. The new firm would be called Shearson Lehman/ American Express (since changed to Shearson/Lehman Brothers); the purchase price was $360 million, of which $325 million went to the Lehman partners (with about $175 million of this sum being the premium above the book value of their stock); an additional $35 million was paid out as an incentive, primarily for nonpartners to stay with the new firm.

In exchange, Shearson demanded that the 57 partners they wished to retain (of the 72 remaining at Lehman at the time of the sale) sign a non-compete contract, certifying that they would not leave to join a competing firm within a 90-mile radius of Wall Street for at least three years. The combined capital of Shearson and Lehman was officially pegged at $1.7 billion.

The Lehman board also met to review the proposed sale that same morning. Here, the vote was not unanimous. Nor was it in keeping with the stereotypes of ''traders'' and ''bankers.'' Opposition to the sale and eloquent pleas on behalf of Lehman's august past and long- term future were advanced by the likes of the rough- edged trader, Richard Fuld; support for the sale came from the so-called traditionalists in investment banking.

Fuld, who played on the Lehman baseball team, who had joined Lehman 15 years earlier, thought no price justified selling. ''I loved this place,'' he said. So he cast one vote against the sale.

He was joined by his close friend James Boshart, who said: ''This is a firm that is 134 years old. People are made partners of this firm as a reward for doing a good job. They didn't start the firm. My feeling is that no group of partners has the right to sell the business and deny an opportunity to nonpartners, to people who had been absolutely integral to the success of the firm the last five years. We are taking the brass ring away.''

The third dissent came from Robert Rubin, who minced no words in accusing his partners of panicking and, above all, of a greed that filled their eyes with dollar signs and blinded them to what Lehman was, and could continue to be. In any merger, he said hundreds of Lehman employees would be summarily fired. Rubin said he was prepared, as were Fuld and Boshart, to shrink the firm in order to preserve its independence.

As board members spoke about the sale, little emphasis was placed on the premium the partners would receive. And little was said of the internal reasons for the sale, which some partners blamed on the new management team. ''Our problem was a political problem,'' says Peter Solomon. ''We had a political situation that could not be resolved, and that's why we were sold.'' Except for Lew Glucksman, everyone spoke, with the majority of the board making clear they favored the sale.

Then it was Lew Glucksman's turn. He said he was impressed with Shearson/ American Express as an organization and as a group of people. ''It is a decent offer. The price is fair,'' he recalls saying. ''And it accomplishes the objectives the board wanted. I recommend it.''

Lew Glucksman cast his vote with the majority, but he was miserable and ambivalent. He did not want to sell, yet he believed there was no other way to assuage the board. He knew that power at the firm had passed from him to the board. And, he says, ''I recognized there was no role for me in the sale to Shearson. This was hardly my choice.''

THE SALE OF Lehman splashed across the front pages. It made the networks, the newsweeklies. It was big news. Glucksman and Rubin felt humiliated. For Pete Peterson, the sale could be viewed as a vindication.

There were ample financial consolations for Peterson and his former partners. Soon after the sale, a friend asked Ellen Schwarzman, who was born to wealth, ''How do you feel?''

''Rich,'' she replied.

Her husband, Stephen, who owned 2,000 shares, netted almost $7 million from the sale of Lehman.

For a relatively modest investment of their own capital - de Saint Phalle says he put up about $150,000 to own about $4 million in shares, before the premium - partners walked away with a tidy sum. Because there were two classes of stock - common and preferred - and senior partners owned the more valuable preferred stock, each partner was paid differently. According to high-level Lehman sources, payments to major partners included the following.

Department heads like W. Richard Bingham, a board member and chief of the San Francisco corporate finance office, or Stephen W. Bershad, who ran the London office, or James Boshart, who was the chief administrative officer, owned about 2,000 shares, and with the premium netted close to $7 million each.

The managers just below the top rung - officers like Henry Breck, Fran,cois de Saint Phalle, Roger Altman and William Welsh, who owned at least 2,000 shares each - netted from $6 million to something over $8 million.

Senior bankers Harvey Krueger and Peter Solomon, who owned 2,400 shares, as well as William Morris, who owned 2,500, collected between $7 million and $9 million each. Richard Fuld and Shel Gordon, who supervised the two major divisions of the firm, owned 2,750 shares each and netted about $9 million and $7.5 million, respectively. Robert Rubin's 2,750 shares permitted him to take home $10 million. Lew Glucksman's 4,500 shares brought about $15 million. And Pete Peterson, who had a clause in his severance agreement stipulating that if the company were sold anytime in a two-and-a-half-year

period he would receive the full premium, got about $6 million on top of the $7 million he had received when cashing out in the summer of 1983.

Glucksman and Peterson had one other benefit due them. Each had a contract promising 1 percent of the profits (after taxes and bonuses) in lieu of retirement income for five and a half years and each had received about $650,000 in 1983. After the sale, Shearson was anxious to change this arrangement, since it provided Glucksman and Peterson a benefit too rich for a public company to bestow. Separate negotiations were conducted with Glucksman and Peterson. Glucksman immediately agreed to waive his contract provision. ''I have enough pride that I put above $600,000-a-year,'' he explained. ''To me it was blood money from all the people who came to work here and who we told we would not sell the business.''

Peterson took a different tack, insisting that a contract was a contract. He agreed to a cash settlement of $300,000 a year for the remainder of the five-and-a-half-year severance agreement. Add to this the $650,000 he received in the fall of 1983 for his 1 percent of profits, the $13 million for his Lehman shares and premium, the $1.5 million bonus, the more than $1.5 million in supplemental retirement benefits for five and a half years. Peterson walked away with about $18 million - $23 million if one counts the $5 million pledged to his new venture capital firm.

Lew Glucksman became a consultant to American Express, signing a four-and- a-half-year noncompete clause that gives him a hefty, but unspecified annual salary. As Shearson vice chairman and chief operating officer Jeffrey B. Lane put it, ''He can watch ships, but he can't go to work for Morgan Stanley.'' In the months since the merger, Glucksman has been named an executive vice president of the troubled Fireman's Fund Insurance Companies. Still, the former chairman of Lehman now reports to another executive.

Robert Rubin also signed a four-and-a-half-year noncompete contract and, as a banking partner at Shearson, spent more time ''watching ships.'' (This month, Rubin announced his resignation from the firm.)

Some Lehman executives were placed in key management positions in the merged firm. Shearson put Sheldon Gordon in charge of the merged investment banking department; Richard Fuld became chairman of the commercial paper division, overseeing operations in government, mortgage and money market securities as well as commercial paper. Both were asked to become senior vice chairmen and to join the Shearson board of directors.

Reflecting his senior status and talents, as well as his unspoken alliance with Shel Gordon, Peter Solomon, after a decent interval was promoted by Gordon to head the M.& A. department of the merged company.

James Boshart, unhappy with Solomon and others whom he believed had disparaged Glucksman & Company and tried to shop the firm, declined to join Shearson/Lehman, preferring to honor a three-year noncompete clause that will keep him off Wall Street.

Stephen Schwarzman tried, in negotiations with his friend Peter Cohen and others, to join Peterson's new firm and to establish a profit-sharing arrangement with Shearson. They could not reach an agreement, and Schwarzman has remained with the merged firm. With the exception of Boshart and William Welsh, who chose to retire and travel, all the Lehman partners who were asked to sign noncompete contracts went to work for Wall Street's newest supermarket.

THE STORY OF Lehman Brothers opens a window onto the turbulent changes taking place on Wall Street, and within capitalism. Looking through that window, different people find different explanations for what happened.

One school sees the sale of Lehman as inevitable, brought about primarily by capital needs and institutional forces beyond the control of Pete Peterson, Lew Glucksman or any mere mortal. Individuals may have made mistakes that hastened what happened to Lehman by a year - or five - but to this way of thinking, the sale was inevitable because private partnerships that try to compete with financial superpowers are doomed.

Through the same window, others see something else. They emphasize human more than institutional culprits. To them, what happened at Lehman is a tale of political intrigue, of incompetence unmatched even in the civil service, a sordid tale of vanity, avarice, cowardice, lust for power and a polluted Lehman culture. To them, these ingredients - not impersonal market forces, not deregulated banking, not competition from financial superpowers - are what ultimately crushed a venerable institution.

''I think Lehman went under in part because the culture there was not conducive to teamwork,'' says John Whitehead, who retired at the end of 1984 as co-chairman of the investment firm of Goldman, Sachs. He blames Glucksman for booting out Peterson, whom Whitehead admires, and for making shortsighted decisions. He blames Lehman partners for being greedy - ''They should have retained more of their earnings,'' rather than siphoning them out of the firm in the form of fat bonuses and dividends for themselves.

Investment bankers, Whitehead implies, have forgotten how to say ''no.'' Roger Altman, who admits to having ambivalent feelings as a citizen about some of the things investment bankers do, says, ''Investment banks respond to clients' interests. Investment banks follow clients, the same as accountants or lawyers,'' he says. ''It wasn't the investment bankers who told the oil companies to get in the mergers game.'' But once they were in the game, Altman says he was ''all for putting additional resources into the mergers area. My job, then and now, is to help earn the largest amount possible for the shareholders.

Since large profits continue to be earned in the merger area, I've supported it all the way. That's our business.''

No doubt what happened at Lehman owes something to both personal and institutional factors, to excess greed and insufficient capital, to a complex of forces that led inexorably to the disappearance of a piece of corporate history.

With the passing of Lehman, Wall Street's oldest continuing investment banking partnership has disappeared. A link stretching back 134 years has been severed, as have commitments to hundreds of Lehman employees. A way of life has passed - of handshakes as solid as contracts, of loyalty between a client and a bank, of fierce but respectful competition, of a belief in the firm as something larger than self.

''This is a firm that survived the Civil War between the North and the South, and could not survive the civil war between Peterson and Glucksman,'' says Michael Thomas, a former Lehman partner and now best-selling author.

Why does it matter that Lehman Brothers no longer exists as a private institution? ''Memories are 50 percent of life,'' says Thomas. ''What will kill this country in the end is shortness of memory. A consensus of memory is important. I think of people like Peterson and Glucksman as custodians.''

This feeling of tradition being traduced is shared by former partner Herman Kahn, 75, who went to work at Lehman as a $15-a-week office boy in 1928, became a partner in 1950 and retired as an active partner in 1970: ''To me, investment banking was a noble undertaking whereby capital was used for social purposes as well as for personal gain. When I started in this business, you had an investment banker like you had a family doctor.''

Kahn was sitting in a small office at 660 Madison Avenue - Lehman's uptown offices. He was joined by another former partner, Paul Manheim, 79, who also joined Lehman in 1928. ''In our day, it was a club. We were all friends,'' says Manheim. ''To them'' - recent Lehman partners - ''it was like joining Metropolitan Life.'' To both men, the sale of Lehman was ''a tragedy.'' ''I wept,'' said Kahn. ''My home was destroyed. My church burned down.''

The same word - ''tragedy'' - is invoked by another Lehman partner, Stephen Schwarzman, who is half their age and a man of recognized talent and charm. Asked why it was a tragedy, Schwarzman looked up from the deck of the pool at his weekend house in the Hamptons and gave a very different answer. He did not first say that the sale of Lehman was a tragedy because of broken traditions, or laid off employees, or empty promises, or the end of another private partnership.

The first words Schwarzman thought to say were: ''This is a tragedy because the business was not sold at the optimal time. Hence, an optimal price was not realized.''

A SUPERPOWER CALLED AMERICAN EXPRESS

If financial service companies were nations, American Express would be a superpower. It is a $10 billion-a-year behemoth whose rivals have names like Citicorp and Merrill Lynch. Publicly owned companies like these are elbowing aside traditional private financial houses in running the international economy. Like planners within a huge government, American Express officials speak of their ''global policy,'' one which reaches into 130 countries.

James D. Robinson 3d, chairman and chief executive officer, says, ''Our own view is that our model should be one of a holding company able to be in any business we choose to be in.'' Twenty years from now, adds Louis V. Cerstner Jr., chairman of the executive committee, there will be a profound ''democratization of financial services.'' In his view of the immediate future, American Express cardholders will have the conveniences of one-stop financial services. In addition to current travel services, there will be American Express cash machines all over the world. Customers will be able to do their banking, financial planning and tax preparation; deal with their broker; buy insurance; invest in a money fund; write checks against the money funds - all at home, on a computer terminal.

American Express took a major step toward becoming a superpower in 1981, when Robinson expended nearly $1 billion in American Express stock to acquire the brokerage company of Shearson Loeb Rhoades Inc., making Shearson its investment banking arm. The name of the subsidiary became Shearson/American Express Inc.

This acquisition blended well with Shearson's own strategy. Sanford I. (Sandy) Weill and a few partners had started the brokerage firm 21 years before and it had grown by ingestion. By 198l, it had swallowed 10 companies, including Hayden Stone Inc.; Shearson, Hammill & Company; Lamson Brothers; Faulkner, Dawkins & Sullivan, and Loeb Rhoades, Hornblower & Company.

Shearson's habit of ingestion continued after it became part of American Express, most notably when Shearson/American Express acquired Lehman Brothers Kuhn Loeb in the spring of 1984. The acquiring company brought to the arrangement vast capital, an extensive brokerage network and a tough, cost-conscious management. But it lacked the prestige, the blue chip clients and talented banking department of a Lehman Brothers. For Shearson/American Express, the hope was that the whole would be stronger than the parts. The value of Lehman was evident in the choice of the subsidiary's names - first, Shearson Lehman/American Express and then simply Shearson/Lehman Brothers.

The disappearance of Lehman as an independent firm, like the sale of other private Wall Street firms, fueled the debate over whether such enterprises are dinosaurs, destined to be digested by a handful of superpowers, or whether the rise of a few superpowers will, in turn, open opportunities for smaller, more nimble entrepreneurs. The jury is out on that question. What is clear is that the steady concentration of wealth in fewer and fewer corporate hands on Wall Street - like the corporate concentration of wealth in farming, in Hollywood, in computers, in financial services, in the automotive and other industries - marches on.

Peter A. Cohen, chairman and chief executive officer of Shearson/Lehman Brothers, defends this concentration of wealth as more democratic than the amassed wealth of an earlier era. ''We're part of a big public company,'' he says. ''The wealth created by the Harrimans, Morgans and Rockefellers was individual wealth. You don't have that going on on Wall Street today. This is a huge country with a huge amount of capital. If our capital 10 years from now is $4 billion, it will still only be a small part of a large arena.''

In this brave new world, says Jeffrey B. Lane, vice chairman and chief operating officer of Shearson, ''I think we will see an era of superpowers in institutional international competition. The walls betwen banking, insurance and brokerage will completely crumble. And competition will be international. The large players will be Citibank, Sears, American Express, maybe American Can or Security Pacific, BankAmerica, A.T.& T. and I.B.M., large German and French banks and Japanese trading houses.'' -K.A.

A version of this article appears in print on February 24, 1985, on Page 6006036 of the National edition with the headline: THE FALL OF LEHMAN BROTHERS: THE MEN, THE MONEY, THE MERGER. Today's Paper|Subscribe